Alnoor Bhimani and Michael Bromwich Management...
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Alnoor Bhimani and Michael Bromwich
Management accounting in a digital and global economy: the interface of strategy, technology, and cost information Book section
Original citation: Originally published in Bhimani, Alnoor and Bromwich, Michael (2009) Management accounting in a digital and global economy: the interface of strategy, technology, and cost information. In: Chapman, Chris S., Cooper, David J. and Miller, Peter, (eds.) Accounting, Organizations, and Institutions: Essays in Honour of Anthony Hopwood. Oxford University Press, Oxford, UK, pp. 85-111. ISBN 9780199546350 © 2009 Oxford University Press
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Management Accounting in a Digital and Global Economy: the
Interface of Strategy, Technology and Cost Information
Alnoor Bhimani
and
Michael Bromwich
London School of Economics and Political Science
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INTRODUCTION
This chapter discusses aspects of the digital economy and globalization and
their influence on management accounting. Strategy, technology and costs,
it is argued, are increasingly co-mingled in globalized and digitized
organisational contexts. Conceiving ways of doing things has traditionally
been regarded as a necessarily disctinct process from the actual execution of
activities. This notion is embedded across the majority of established
enterprise management approaches. But managerial intentions and actions
are becoming intertwined in many enterprises. Decision-based thinking does
not necessarily always precede managerial action. The chapter discusses
how digitization and globalization are altering decision making processes and
organisational action. It does so by considering virtual organization based
issues and some wider possible implications for strategic management
accounting. A case study of a firm tackling digitization and globalization
issues is discussed before presenting some brief conclusions.
THE DIGITAL AND GLOBAL ECONOMY
Gutenberg’s printing press was, in the fifteenth century, an information
technology (IT) revolution. In this past century, this revolution has continued
– IT has become faster, cheaper, easier to use, more versatile and more
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extensively impacts enterprise processes. IT is today effectively ubiquitous
across organisations and central to economic activities. So much so that
many regard modern times as being a “digital economy” represented by:
…the pervasive use of IT (hardware, software, application and telecommunication) in all aspects of the economy, including internal operations of organizations (business, government and non-profit); and transactions between individuals, acting both as consumers and citizens, and organizations (Atkinson and McKay, 2007, p.7).
Communication technologies including telephony, radio and television have
over much of the past century evolved very rapidly in terms of functionality,
capacity and features but have only partially engaged computer
technologies in doing so. Some of the most important developments in
telephony have been the introduction of optic fibre networks in the late
1980s, greatly increasing storage and processing capacity, the enormous
growth in mobile phones providing much flexibility in communication and
the introduction of broadband in the early 1990s.
Computers have since their invention in the 1940s, also developed at an
extremely rapid pace. The vast majority of managers and administrative
employees today access or influence others through a desktop or mainframe
computer. Another industry which has seen extensive continuous
improvement over the twentieth century is that of media and entertainment.
As distinct industries, what has been achieved by computer technologies
alongside the transformation of telephony, media and entertainment as well
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as the software industry during the twentieth century has been wide
reaching and transformational. But the digital economy could only emerge
from the convergence of these different industries.
It is now incongruous to think of these industries outside the context of their
merged potential. The internet achieved its large scale impact given the
wide level availability of computers and network technologies. This then
paved the way for media and commerce to become electronically
interconnected. The ready availability of software applications and content
was in turn enabled by connectivity. The large scale availability and effective
commoditization of digital cameras, handsets, mobile telephones, flat-screen
high definition TVs and MP3’s has been fuelled by networked IT systems
enabling greater coordination. In other words, digital convergence is at the
heart of creating an irreversibly connected environment which has brought
previously distinct industries together. The result is that it is rapidly
becoming inconceivable for traditionally independent machines, software
systems, PCs and communication products to be regarded as not
networkable.The digital age is an enmeshed world of interpenetrating digital
devices affecting very many areas of social and economic activity.
This chapter argues that the convergence of the technologies described
above and their economic, managerial and social impacts raise important
issues for the premise upon which management accounting is now founded.
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Financial control and management accounting activities as part of the digital
economy are at a turning point facing the likelyhood of extensive alterations.
They are having to cofront a much closer integration of decision making and
action in supporting the co-mingling of strategy, technology and cost
information.
GLOBALIZATION
The challenge to accountants to respond to the digital economy arises not
just given the above discussed shift, but also in terms of other dimensions of
globalization. There are many definitions of globalisation. One is:
Globalisation is about the changing influence of space and time in our lives. With the advent of the communications revolution distance has a different relationship to self-immediacy and experience than it used to have. Distance isn't simply wiped out, but when you have a world where the value of the money in your pocket is affected immediately by ongoing electronic transactions happening many miles away, it's simply a different situation from how the world was in the past (Giddens, 1999).
.Another:
Almost all contemporary social theorists endorse the view that globalization refers to fundamental changes in the spatial and temporal contours of social existence, according to which the significance of space or territory undergoes shifts in the face of a no less dramatic acceleration in the temporal structure of crucial forms of human activity (Stanford Encyclopedia of Philosophy, 2002).
Globalization in every day language refers to the diminished distance and
time between countries, organisations and people. In industry and services,
firms are seeking to supply globally, they are establishing a presence
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across the globe and are outsourcing throughout the world. The digital
economy and globalization are leading organisations to base their strategies
on the opportunities and challenges of these environmental influences.
Figure 1 shows some of the areas held to be highly important in
globalisation for a manufacturing or service organisation. The broad arrows
indicate that organisations can establish strategies in these areas. Thus,
strategy identification is seen as fundamental to effective globalisation. The
thin arrows indicate that the digital economy is viewed as enabling or
facilitating globalisation in each of these areas. The arrow from accounting
indicates that accounting is seen as having a role in strategic choice. The
globalisation opportunities in most of the areas listed are well known.
Thus, in seeking to raise capital , the choice is to fund locally or from
international markets. The latter opportunity is becoming extensively
dependent on the digital economy. Similarly, consumer supply choices
reflect whether to supply locally, to a number of countries or for some
product or services, to supply globally. These choices also require decisions
on the mode of supply including between joint ventures and direct
investment overseas. Again, the digital economy facilitates such
endeavours, not just with regard to initial set up but also in reporting and
monitoring progress.
Similar considerations apply to the supply chain. Here, accountants in
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addition to reporting and monitoring may be involved in investment appraisal
and in make or/and buy decisions and performance measurement. In some
firms, planning departments may be closer to strategy than accounting
departments and may play the lead role in appraising investments and
analysing outsourcing decisions. All these roles reflect aspects of the digital
economy. The broad arrow to government in Figure 1 reflects the ability of
governments to inhibit or encourage globalisation and to facilitate or hinder
the adoption of elements of the digital economy.
.
To bring out some of the cost and learning relationships in a digital economy
allowing cross-organisational and global exchanges, the next part of the
chapter discusses changing enterprise structures. Collaborative firm linkages
and pure trading relationships are explained and how pure trading links
between firms can be restructured by virtual enterprise forms enabled by IT
innovations is explored. Associated cost and strategic issues are
subsequently identified. The possible implications of this shift for
management accounting are carved out drawing on the above arguments.
EMERGING ENTERPRISE STRUCTURES FROM VIRTUAL LINKS TO ALLIANCES
The “make-or-buy” option for a firm requiring subcomponents or input
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material has been extensively discussed in the management accounting
literature. Conceptually, the costs and benefits accruing to a firm
producing required parts or subcomponents internally are weighed against
the financial and managerial consequences of outsourcing via competitive
bidding by suppliers of the products (Callioni et al, 2005; Dekker, 2004;
Groot and Merchant, 2000; Meer-Kooistra, 1994; Quinn and Hilmer, 1994;
Speklé, 2001;Vining and Globerman, 1999). Economic theorising on
transaction costs has shaped accounting thought on firm structure over a
long period. Incremental cost analysis has been advocated as an
appropriate approach to assessing the financial consequences of buy/make
managerial decisions.
The virtual firm enabled by digitization can be regarded as an agglomeration
of multiple “buy” transactions weaved together by extensively structured
coordination. Cost analyses are likely to entail a variety of factors reflective
of the complexities of such an agglomeration. Ultimately, the “make-or-
buy” decision can in some virtual contexts become a “make-or/and-buy”
series of decisions. These decisions may themselves be grounded in the
implementation of the decisions.
Over the past two decades, much has been written about alterations to
buyer-supplier links enabling firms to consider an alternative to the make or
buy option: the collaborative relationship (CR) which is in effect a "quasi-
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vertical" form of integration (Das and Teng, 2000; Richardson, 1993;
Tomkins, 2001). CRs play an increasingly prevalent role among many
enterprises today (Handfield et al, 2000; Helper and Sako, 1995; Lambert
and Cooper, 2000; Leiblein and Miller, 2003; Liker and Choi, 2004; Sako,
2008; Trent and Monczka, 1998). Sheth and Sharma (1997, p.91) note that
...organizational buying is dramatically shifting from the transaction oriented to the relational oriented philosophy and will shift from a buying process to a supplier relationship process.
Management accounting scholars have commented on the control
implications of this shift (Anderson and Sedatole, 2003; Dekker, 2004;
Hakansson and Lind, 2007; Kamminga and Van der Meer – Kooistra, 2007;
Kraus and Lind, 2007) but have not formally addressed its implications for
cost management processes. These relate to product development input,
price rebates, after sales warranties, supplier inspection policies and
information systems integration. Many scholars recognise that strategic and
contractual issues between buyers and sellers are gaining relevance,
particularly in new product development contexts (Arnold, 2000; Axelson et
al, 2000; Cousins, 1999; Gadde and Snehota, 2000; Narayanan and Raman,
2004; Reyniers and Tapiero, 1995).
The development of relationships-based or collaboration-oriented purchasing
behaviour is influenced by many factors including similarities between the
industry and technologies of buyers and suppliers (Buvik and Halskan, 2001;
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Dalmin and Mininno, 2003; Gadde and Häkansson, 2001); prior experiences
of change among suppliers (Frey and Schlosser, 1993, Hahn et al, 1990);
effective communications between buyer and suppliers (Hoberman and
Mailick, 1992; Lascelles and Dale, 1989; Mohrman and Mohrman, 1993; Van
Weele, 2000); the creation of cost information exchange relationships
(Ellram, 1996), and the consideration of purchase leverage factors and
volume of initial business (Billington and Ellram, 2001; Kulmala, 2004). The
importance of experiential learning is a major characteristic of customer
supplier links and of living in a digital and global economy (Bessant et al.,
2003; Dyer and Singh, 1998; Krapfel et al, 1991; Langfield-Smith and
Greenwood, 1998; Stjernstrom and Bengtsson, 2004).
In practice, two options generally exist for a company wishing to purchase a
subcomponent or a service-based product from an external supplier. On the
one hand, the buyer can put out a bid tender and choose the most
competitive quote for a certain number of parts over a period of time.
Benefits from past performance are limited; exchanges tend to be at arm’s
length and product specifications; and prices are well defined. In contrast to
this transaction-based competitive bidding approach, the buyer can establish
a collaborative relationship with a supplier. Such a relationship would entail
sharing of technical and financial information, managerial interaction and
liaison and a more flexible buyer-supplier link as to time/volume variables
and product specification. The costs involved in identifying the right supplier
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for a collaborative relationship and operationalising such a link differ from
those in a bidding situation. Firms regard one or the other approach as a
strategic issue.
Traditional competitive purchasing entails the assessment of certain
economic transactions whose terms are made explicit prior to the
commencement of trading. Agreements (contracts) with recourse options for
faltering on the terms of the contract and the buyer-supplier link is designed
within attempts to minimize each party's dependence on the other. In
contrast, collaborative subcontracting relationships are founded on trust and
transactional dependence with specific supply undertakings (often made
orally) extending over only part of the overall trading relationship. The
obligations of such long-term relationships are diffuse and guide the
resolution of specific transaction problems on a case-by-case basis usually
through informal channels. The collaborative link exhibits mutual
indebtedness that can extend over long periods of time with a loose principle
of give and take. The usual pure buy situation is characterised by narrow
and formal channels of communication between the buyer's purchasing
department and the supplier's sales department whereas a CR tends to have
extensive and multiple channels of communication between a variety of
functional managers and departments within the two companies.
The most significant difference between a pure purchase and a collaborative
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linkage is that the latter establishes non-specific terms of trade as to supply
quantity, timing of supply, product specifications and product price at the
time of establishing the trading relationship. In contrast, in pure purchase
contexts, the economic exposure can be calculated with a high degree of
accuracy prior to the commencement of trading. Table 1 identifies some
contrasting characteristics of collaborative alliances and pure trading.
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Buyer-Supplier Link Characteristics
Pure Trading
Collaborative Relationship
Knowledge
Proprietary
Operational knowledge flows between each party and there is sharing of information between competing suppliers.
Price
Lowest bidder usually obtains contract
Immediate price competitiveness is often secondary
Timing terms
Strictly stipulated penalties for deviations from contractual terms. Commitments tend to be short-term.
Option exists to delay and even abandon purchases either temporarily or permanently without relinquishing buyer-supplier link over long term.
Contract specificity
Product specifications usually predetermined
Limitless product specification changes may be made
Communication channels
Narrow and formal
Multiple channels, information exchange is less formal and more frequent
Contrasting Characteristics of Pure Trading versus Collaborative Relationships TABLE 1
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The absence of a contractual predetermination of quantity, price and timing
of supply makes it difficult to assess the financial consequences of creating a
CR trading link. The buyer's ability to alter quantities purchased from the
supplier and the buyer’s, and sometimes the supplier’s, power to change
product specifications confers operational flexibility. There may be a variety
product life cycle considerations that affect strategically desirable time
frames relating to market entry (Dunk, 2004). Additionally, both parties
learn from producing, transacting and cooperating with one another which
brings about cost consequences and interdependencies. An alliance creates
the possibility of rapid expansion and growth in ways not anticipated at the
outset (Child, 2005).
The initial subcomponent cost or service offering cost of a supplier able to
engage in a CR may be greater than that in a pure trade with a supplier
but this needs to be evaluated in terms of foregoing the payoffs from a CR.
In particular, the transfer of knowledge and the availability of flexibilities say
between a supplier and assembler may over time contribute to value
advantages exceeding those of pure initial subcomponent price differentials
between a competitive bid purchase based on a contract and a CR
(Gietzmann and Larsen, 1998).
Some firms will opt for both CR and pure trades depending on their
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purchasing portfolio mix (Axelson et al., 2000). If there are learning effects,
costs will possibly decrease with output. Process improvement, product
standardisation, economies of scale and other elements can all offer
learning. The extent to which economies which emerge out of learning
varies across and within industries and is conditioned by differences in R&D
expenditure and capital intensity as well as team effects (Dyer, 1997; Dutton
and Thomas, 1984; Gruber, 1992; Lieberman, 1984). In practice, learning
effects are higher under CR links than in trading links.
In broad terms, the decision to enter into a collaborative relationship with a
supplier as opposed to engaging in transaction focused pure purchase for
required products entails a variety of organisational consequences with cost-
benefit implications that stem from the various options affordable by the
alliance. Learning and knowledge transfer play a key role. This is so for
collaborative alliances where the nature of interactions facilitates information
exchange both formal and informal as well leaving loose certain terms of
trade including the length of the relationship. Conversely, pure purchase
situations and particularly those enabled electronically within virtual firms,
allow little room for collaboration or for learning which is not a primary
objective of the virtual firm set-up.
The features of CRs have control issues relating to the flexibilities offered
vis-à-vis the resource implications of establishing CRs. Creating an alliance
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can be time consuming with resources being required to set up a workable
trading infrastructure. There has to be an infrastructure and a willingness to
share operational information including accounting information between the
trading entities (Dyer and Singh, 1998; Handfield et al., 2000; Vining and
Globerman, 1999).
Learning effects affect the economic viability of engaging in a supplier
alliance. Cost reductions can flow from a subcomponent supplier to the
partner firm as part of a CR. It may be possible for the firm to earn superior
returns through learning rate differentials from a CR which may not be
acceptable via virtually structured coordination. As elaborated below, virtual
firms are not designed to tap into organisational learning. Whilst the
accounting literature recognises learning related costs effects, the strategic
implications of establishing both collaborative and virtual relationships are
complex and have not been investigated to any great degree. The next part
of the paper considers the virtual organisation as a rapidly emerging form.
THE VIRTUAL ENTERPRISE
This section explains the basis upon which “virtual” enterprises operate and
provides an illustration of the governance and control mechanisms in place
which, to a degree, pre-empt the dissociation between thinking and acting
and planning and control.
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A virtual enterprise has been considered to be:
… a temporary network of independent companies-suppliers, customers and even rivals-linked by information technology to share skills, costs and access to one another’s markets. This corporate model is fluid and flexible ( Byrne et al, 1993,p36).
Stress has been placed on bringing together resources and goal
achievements via the view of a virtual enterprise being a goal-orientated
arrangement between several firms or a unit within a firm which temporarily
assembles dispersed competencies and capabilities. Virtuality has been taken
to suggest transient connections between otherwise independent entities via
appropriate IT structures:
A virtual company is created by selecting organizational resources from different companies and synthesizing them into a single electronic business entity (Nagel and Dove,1991).
Of particular note is that the creation of this organisational form raises the
question of the goal realization path:
The essence of the virtual organization is the management of goal-orientated activity in a way that is independent of the means for its realization. This implies a logical separation between the conception and planning of an activity on the one hand, and its implementation on the other (Moshowitz,1994, p279).
Implementation necessitates the planning of certain decisions to be achieved
during implementation action rather than a priori. One characterizing feature
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of virtual organisations is the commoditization of information to enhance
flexibility and “infinite switching capacity” so that “by reducing dependency
on the human being as the bearer of knowledge and skill, it is possible to
increase the flexibility of decision-making and control to unprecedented
levels” (Mowshowitz, 1994, p281). A second feature is the standardization of
interaction whereby enterprises can be readily coupled and decoupled as the
need for altered supply arises. This is enabled by the codification of
information (Boisot, 1998) which provides a basis for enhancing
information’s control potential.
A virtual enterprise is likely to have overhead costs largely tied to running its
information systems infrastructures and carrying out coordination processes.
Additionally, overhead costs will reflect personnel costs with employees likely
being rewarded on some measure of coordination effectiveness. Virtual
corporations may find the achievement of scale and scope economies difficult
and will have to seek value creation through coordination structures and
flow mechanisms rather than by reducing costs of material input, processing
or packaging for physical products. This is because virtual flows are set up
with quite specific pre-determined objectives for suppliers followed by
disengagement. Proprietary information leakage can be a risk with
precaution against opportunistic behaviour also being essential.
Within virtual corporations, little room exists for tapping into organisational
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learning. A virtual organisation is effectively “a repertoire of variable
connectable modules built on an electronic information network” (Child et al,
2005, p168,) with each linked firm’s function being to deliver a specific
standardization output before decoupling. The intent is to create a flexible
organisation of companies whereby each undertakes one or more functions
rather than to provide a structure for enabling information exchange with a
view to learning.
Managerial emphasis within virtual enterprises is placed on sound
information processing as well as on the coordination of individuals and
connecting firms, and on guidance via the clear articulation of the
organisation’s vision. Managerial focus is on the management of people,
coordination activities and technology. If carried out effectively, the benefits
to the corporation will be the sound management of integral supply chains,
desired response to competitors’ actions, and shorter time to market. Such
consequences can come about in the face of very low face-to-face contacts
(Fritz and Manheim,1998).
Significantly, virtual organisations are less focused on controlling how work is
undertaken and more on outcomes of work. A firm which has its own
hierarchy to carry out activities will be highly integrated. Its insourcing
activities will need close operational controls. It will retain high involvement
with physical processes. At an opposite extreme, an organisation may
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structure itself as a virtual trading firm with arm’s length transactions
enabling short term exchange between electronically linked organisations.
The focus here will be on coordination rather than ownership of physical
assets and on operating as an “intellectual holding company” (Straub,2004,
p. 300).
Traditionally, individual firms carrying out operational activities will invest in
process controls via standard costing analysis and budgetary controls based
on operating plans and activities. They will be aware of and be able to act on
performance monitors of their output. Conversely, the virtual trading firm
will focus on outcome controls. In virtualizing, firms become less
operationally management control orientated and instead, evaluate
performance by monitoring outcomes. The ability to monitor outsourced
processes via outcome controls becomes a relevant core competency for
virtual corporations. Where a firm has integrated activities, it will control its
processes via some equity in production activities providing legitimacy for
monitoring those processes. A virtual firm by contrast will likely not hold an
equity position vis-as-vis the purchase or trading partners it engages with
and its core resource for effective coordination and service delivery will lean
toward outcome-based performance controls.
Focusing on the control of outcomes without an equity stake engages a shift
in the balance and focus of costs for an enterprise. Typically, disengagement
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from owning resources and emphasizing coordination can be accompanied by
a tilt towards variable costs and a lesser fixed cost base. However, if the
scope and scale economies hurdle which virtual firms typically face can be
overcome, reduction in both fixed and variable costs can accrue. Such a
position gives rise to network effect like benefits. Larger virtual firms become
bigger because of their ability to tap into scale benefits as they enlarge. The
chapter next discusses some of the possible accounting effects of these
influences and, more generally, those arising from globalization.
THE END OF LINEARITY
In a digitized and globalized complex enterprise, people can act whilst
thinking about desirable actions. Actions subsume or include objectives.
That is, objectives become defined simultaneously with actions and are
embedded in actions. Processes therefore become concomitant with
intentions. However, management thinkers in the past have mostly regarded
decision-making activities and managerial action as being sequential. The
notion that some organisational actors think whilst others engage in action
became a characterizing feature of industrial management at the turn of the
last century. Management accounting is archetypical of this approach when
historically characterized as providing only information for decision making.
Conceiving ways of doing things is mostly still regarded as an activity that is
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distinct from the actual execution of desired activities. This is embedded
across the majority of prescribed approaches to enterprise management.
Managers however often think of strategic processes and related
organisational activities as being closely intertwined.
Given the extent to which professional management accountancy bodies are
embracing a more strategic posture for the field, strategic thinking in the
practice of financial and cost management is an increasingly important issue.
Financial managers and accountants are encouraged to be more strategic
(Nyamori et al, 2001,p.65). Strategic control and cost management
frameworks define approaches to strategic decisions as distinct from their
implementation and from operationalising separately derived
intentions.Retaining the traditional staff instead of line role for accountants in
organisations makes it difficult for strategic thinking not to be viewed as
dissociated from operational action. Many cost management approaches,
including activity-based management, product life-cycle costing, target cost
management, customer profitability analyses and strategic investment
appraisal among others, have been predicated on the idea that strategic
thinking should guide managerial action (see Langfield-Smith,2008).
Essentially, it is still believed that conceptions of intent should be
formulated prior to the implementation of decisions.
Within emerging organisational structures, the notion that strategic decisions
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should uniformly be dissociated from action may be a partial view. In the
digital economy, businesses cannot separate all technological or
operational activities from their strategic decision-making processes. The
meshing of strategic, technological and operational factors suggests a need
to reformulate management accounting precepts across at least some areas
whereby reported management accounting information is used within
emerging organisational forms.
Industrial enterprises may have been regarded as being able to predefine a
strategy in order to modernize production processes. Decision-makers
would then have been presented with technological improvement investment
options. Supporting accounting and financial information on the likely
economic implications would subsequently have been collated and supplied
to the decision-makers so that managerial action would rest on financial
analyses of possible technological options stemming from the strategy being
pursued.
But the co-mingling of strategic, technological and operational decisions
within many new organisations implies that managerially useful information
can no longer be purely financial whereby strategic intent and technological
options are regarded as distinct elements that are separable from one
another and which follow a sequential path. What comprises relevant
information and the presumed sequence of its deployment vis-à-vis
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management accounting action in the organisationally networked world has
to be reconsidered.
Just as convergence among previously distinct and independent industries
has integrated desire and action,so is management becoming integrated in
terms of decision making and action. Consider for instance emerging
enterprise software applications. A leading player in the Enterprise
Resources Planning (ERP) market is SAP. SAP is seeking to link Business
Intelligence (BI) solutions to its existing ERP-based approaches. This is
being undertaken on the argument that the distance between analysis and
execution is being eliminated in enterprises – to create a “closed loop” of
performance management. The Strategic Marketing Director for Business
Objects at SAP notes that: “…when BI and ERP are integrated, business
processes can automatically be redirected on the basis of analytics, removing
the need for explicit decision making” (T. Elliott in Information Age, June
2008, p. 41). Separating thinking from action is not seen as an essential
step for some organisational systems designers and decision makers. Coca-
Cola’s Innovation Specialist in the German Customer and Business Strategy
Department notes that there is the potential within enterprises to “close the
gap between modeling and executing and so the gap between IT and
business” (A. Grobe in ibid.). Management accounting information systems
may follow suit.
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Without being partners in the strategic integration of decisions and actions,
management accountants are limited in the roles they can play in helping
firms to adjust to the digital economy and to globalization. In
contemporary organisations, accountants are not seen as “owning” either
the foundational disciplines of the digital economy or being responsible for
the major elements that underlie globalization. Taken to an extreme, this
view would restrict management accountants to their traditional roles of
aiding investment and other management decisions and reporting on and
monitoring the plans of others. Admittedly, these are more difficult tasks in
digitized and global organizations, especially in devising appropriate
reporting platforms and performance measurement systems.
Financial information relevance is increasingly about the effective
representation of strategic and technological interdependencies enabling
managerial decisions to align with present day organisational action. In some
situations, the coupling of strategy, technology and process are coordinated
by informational intensity. Enterprises which depart from the industrial
structural model couple strategic and financial considerations. The
interrelationships make it difficult for management accounting activities as
they exist to rest within specific predefined entry points. Financial
information is potentially becoming integral to and immanent within
assessments of operational, strategic and cost considerations.
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Identifying how new organisational forms bring about new informational
dimensions that can impact organisational action with consequences for costs
is relevant to consider. In particular, although accepted technical wisdom
proposes that traditional incremental cost analysis can be applied to internal
production versus outsourcing decisions, modern enterprises operating in
digitized and globalized environments indicate the need to problematise this
notion. The structure within which organisational transactions take place
have altered the extent and consequences of strategic thinking as well as
associated cost/revenue impacts.
MANAGEMENT ACCOUNTING AND STRATEGY
The above perspective on the digital economy suggests that management
accounting thinking may likely witness changes given the
interdependencies between strategy, technology and financial control.
Similarly, the effects of globalization highlight altered conceptions of
strategy’s role in relation to the finance function. Strategic decisions as has
been argued are co-mingled with technical and control issues (Bromwich,
1990, Bhimani, 2008, Rayport and Jaworski, 2003). Historically,
management accountants have played a relatively indirect role in strategy
determination- providing information seen as having strategic implications
(Fern and Tipgos, 1988, Bhimani and Keshvarz, 1999). Anecdotal evidence
suggests that many managers either have or would welcome accountants
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taking a more proactive role in strategy formulation if not also
implementation. This is to possibly avert those involved in strategic decisions
entirely favouring strategies reflecting their own personal and
professional interests with a lesser concern for the cost-based aspects of
accepted strategies. This points to the need for accountants to understand
the organisation’s changing nature and its dependence on the technologies
underlying the digital economy and the globalization process. But there
is evidence that the management accounting discipline including more recent
and avant guarde ideas related to strategic management accounting are slow
to change.
There is very scant empirical literature concerning the accountant’s role in
strategy except a few studies concerning the applications of what is
sometimes called strategic management accounting (SMA) which is briefly
discussed below (see also Bhimani and Langfield-Smith, 2007 ). Two recent
UK studies of what management accountants do are Burns et al, 2003 and
Burns and Yazdifar, 2000 which both surveyed a small sample of UK
members of the Chartered Institute of Management Accountants , the first
in 1997 and the second in 2000. These studies focused on why management
accounting systems seem to be slow to change. The 1997 study suggested
the then new techniques were taken up by accountants but in a relatively
moderate way but the 2000 sample expected their usage to grow
substantially. New methods of aiding strategy were used by 27 percent of
28
the sample in 1997 but the 2000 sample, perhaps, optimistically, expected
the take up rate to be 65 percent by 2005. More studies are needed to
monitor these developments. A recent study of 41 UK manufacturing
companies (Dugdale et al, 2006) suggests that management accounting
systems were basically traditional, featuring budgeting , standard costing
and incentive systems based on accounting numbers. An interview based
survey of 16 manufacturing companies in Ireland found that accountants in
the early and mid 2000s in their decision making role were seen by other
managers not as decision partners but as information providers and that in
the main modern accounting techniques were not implemented (Byrne and
Pierce, forthcoming). However, the strong emphasis on contribution
reporting and reporting non-financial performance measures found by
Dugdale et al (2006) suggests some response to strategy matters. There is
also evidence from case studies of the emergence of what are called hybrid
accountants who combine the skills of business managers and accountants
working very closely with process managers (Burns et al 2003). Such
accountants may be more willing to reshape management accounting design
and processes around the digital economy and globalization issues.
STRATEGIC MANAGEMENT ACCOUNTING
Rather than accountants getting fully involved in strategy formulation, some
commentators have suggested they should seek to provide more
29
information specifically tailored to strategy (Simmonds, 1981 and Shank,
2006). What has often been called strategic management accounting (SMA)
refers to a variable portfolio of financial techniques geared towards aiding
strategic decision making rather than dealing with the tactical and
operational issues which are focused on in traditional management
accounting. SMA usually encompasses two types of information (Langfield-
Smith, 2008). The first concerns providing information and future estimates
concerning consumer markets, especially customer characteristics, and
competitors, especially their cost structure, both currently and in the future
(Bromwich, 1990). The second type focuses on the industry value chain
and the company’s position in this chain leading to reconfiguring the
enterprise’s value chain (Shank and Govindarajan, 1993). This information
would seem to help in those strategic decisions prevalent in in a digital and
global environment. Both field studies of SMA and the survey literature
on SMA are sparse. Generally, SMA adopts prescriptive rather descriptive
views of strategy (Bhimani, 2008). Two field studies are Lord, 1996 and
Dixon, 1998 which both suggest that SMA practices are used in highly
specific ways and that accountants were not involved in these
implementations of SMA. A more recent study of a large multinational
German company did find evidence of the use of SMA and the strong
involvement of controllers using and developing SMA ideas (Tillmann and
Goddard, 2008).
30
Although the term SMA seems only to be recognized sporadically in
practice, many of the techniques that are generally recognized as elements
of SMA are found to be used in practice. However, these may be
performed either entirely by non-accountants or in combination with hybrid
accountants even though SMA implicitly claims these techniques for
management accounting.
Researchers especially those undertaking surveys include different
techniques as comprising SMA. Such lists include the costing of product
attributes, brand value accounting, competitive positioning, pricing relative
to competitors, life cycle costing, quality costing, strategic costing relative
rivals, target costing and value chain costing (Guilding et al, 2000). Other
techniques that could be added are activity based costing geared towards
costing strategies, benchmarking and accounting for servicing groups of
similar customers (Cinquini and Tenucci, 2007).
A leading survey article in this area is Guilding et al (2000), which surveyed
the use of what are usually called SMA techniques in the largest companies
in New Zealand, the United Kingdom and the United States of America. The
response rates were 51%, 38% and 13% respectively. The study asked
about the usage of 12 SMA practices measured on a 7 point Likert scale
with 7 indicating use to a great extent1. The usage of only two practices
1 These 12 practices were classified into three groups: those concerned
with strategic costing and pricing made up of attribute, life cycle,
31
in the set of techniques labeled costing and pricing scored above the mid
point on the scale or around the mid point in both the full sample and for
individual countries samples. The rankings for the perceived merit of these
practices yielded much higher scores on a scale: not at all helpful/ to a large
extent helpful. All but one of the practices scored at mid point or better in
the full sample with strategic pricing and costing getting scores of well over
5 and nearly 5 respectively. This does suggest that further development of
these techniques which may be deemed germane to decision making in the
digital and global economy are likely.
The second set of techniques were concerned with competitive position and
performance and competitor cost assessment generally scored between 4
and 5 for usage and nearly 6 on their merit. This is encouraging as these
practices seem very relevant to assessing the organisation’s competitive
adaption to the digital economy and globalization.
The results of this study with regard to the first set of techniques have been
used to suggest that SMA has not really shown the promise its advocates
have claimed. The sample included companies likely to exhibit very
different characteristics not captured by adjusting for company size.
Possibly the usage of SMA techniques may depend on organisational
quality, target, value chain costing and strategic costing and strategic
pricing, the second comprised of competitive accounting made up of
competitive position monitoring and cost assessment and competitor
performance based on published financial statements and the third was a
32
characteristics. For instance a cost leader organisation may use different
SMA practices to those used by a differentiator company or, differ in the
intensity to which they are used. Using average scores over the samples may
not capture this.
A more recent study of the largest Italian manufacturing firms attempted
to incorporate the contingent factors likely to affect the usage of SMA
techniques (Cinquini and Tenucci, 2007). The final sample was 93
organisations and 14 SMA techniques were employed in the questionnaire.
These practices built on Guilding et al, (2000) (see also Guilding and
McManus, 2002) , with activity costing, customer accounting, intergrative
performance measurement (balanced score card) and benchmarking added
and brand value measures deleted. The respondents were asked to rank
these practices on a 5 point Likert scale related to usage where 1 equals
“never” and 5 “always”. Here the scores were substantially higher than in the
Guilding study. Attribute costing ranked the highest and the scores for
only two measures fell below the mid-point of the scale. It is shown that
relatively few organisations use all the techniques but that most use up to 10
of these practices. Most of the contingency variables investigated did not
explain organisational use of SMA measures except for parial support being
found for differentiators using SMA techniques more than cost leaders,
though as might be suspected cost leaders do use the relevant cost
group of two measures relative to brand values.
33
measures. Firm size was not found to be important but this may reflect the
narrow base of the sample. Given the earlier suggestion that an
important role for accountants in the global and digital economy was
project appraisal, It is surprising that neither of the surveys considered this
from a strategic perspective in terms of, at least asking about the use of
what has come to be called strategic investment appraisal (Bromwich and
Bhimani, 1994; Shank, 1996).
Even given the concerns that have expressed about SMA, the arguments
here suggest that organisations seeking to adapt to the digital and global
economy should consider experimentation with and the use of these
techniques where appropriate. The next section considers a brief case study
of a firm experimenting with collaborative alliances to bring out some of the
accounting implications. It points to the co-mingling of strategy, technology
and cost management as well as to the impact of globalization and
digitization on possible organisational processes and opportunities.
LI AND FUNG: A VIRTUAL ENTERPRISE WITH COLLABORATIVE ALLIANCES
The Li and Fung group was founded in Guangzhou, China, in 1906. Li & Fung
was one of the first companies financed solely by Chinese capital to engage
directly in exports from China. It initially traded largely in porcelain and silk
before diversifying into bamboo and rattan ware, jade, ivory, handicrafts and
34
fireworks. From 1996 to 2007, Li & Fung’s annual turnover rose nearly seven
fold and its profits grew nearly six fold (McFarlan et al; 2007).
The group has today activities in export sourcing, distribution and retailing
with 26,000 employees across 40 countries and with revenues of almost
US$14 billion in 2007 (Liandfung.com). It is the world’s largest outsourcer
(supplier) in the garment industry. Li & Fung is a now a virtual company
with collaborative links, acting as a value chain coordinator. It does not own
any manufacturing capability but rather, coordinates a network of over
10,000 suppliers. Li & Fung “does not own a stitch when it comes to making
garments. No factories, no machines, no fabrics. Instead, Li & Fung deal
only with information.” (Lee-Young and Barnett 2001, p. 77).
The core business of the firm is to serve as a “one-stop shop” for Western
retailers by delivering a “global value-added package,” including “product
design and development, raw material and factory sourcing, production
planning and management, quality assurance, shipping consolidation.” (Ibid).
Li & Fung illustrates a key present trend of the textile and garment industry
which is that processes and exchanges have become increasingly fast and
globalised while remaining embedded in local milieus from the viewpoint of
customers.
The company is organised across over 90 autonomous subsidiaries, located
35
close to major markets, which is considered critical in a fashion-orientated
industry. The Hong Kong-based headquarters provides the centralised IT
system and financial and administrative support (McFarlan and Young,
2000). An important factor in the company’s success is that it allows small
and medium-sized manufacturers in developing countries, to meet together
for doing business, while benefiting from scale economies which derive from
its large purchasing and sales volume.
Li & Fung has offices in nearly all the global regions significant in textile and
apparel manufacturing. The company’s philosophy rests on a continuous
search for low costs and utmost flexibility. Li & Fung-led manufacturing
operations illustrate relevant aspects of the much finer spatial division of
labour that characterizes the digital economy (Bhimani, 2003). The
dispersion, density and diversity of the network of suppliers allows Li & Fung
to switch easily from one manufacturer to another. If a part of the supply
chain-manufacturing or shipping collapses for technical, social or political
reasons, Li & Fung can readily switch to another supplier elsewhere in the
world. The profit possibilities of electronic operations in terms of flexibility
and time-to-market capabilities are extensive. Prior to the fabric being dyed,
the client can alter the colour and size prior to cutting (McFarlan and Young,
2000). This level of agility has been referred to as the “power of
postponement” harnessable for mass customization requirements (Feitzinger
and Lee, 1997).
36
The tradition of retail stores was in the past to rotate their inventory through
the four primary seasons, so that goods where shipped four times a year.
Currently, the trend has moved to getting fashions in and out more quickly
with lower life cycles and a greater variety to customers on a more regular
basis. Zara uses a similar strategy in its retail operations (Guemawat and
Nueno, 2003).
Li & Fung’s investments in information technology helps it manage the
logistics of the supply chain process similar to Zara. Li & Fung focuses on
connecting and sharing information across the customers, sourcing, offices
and factories. Its operating groups adopt each specific customer’s in-house
system software systems from logistics to billing. In this manner,
collaborative relationship potential is created. Victor Fung, the company’s
Chairman, explains:
Say we get an order from a European retailer to produce 10,000 garments. We determine that, because of quotas and labor conditions, the best place to make the garments is Thailand. So we ship everything from there. And because the customer needs quick delivery, we may divide the order across five factories in Thailand. Effectively we are customizing the value chain to best meet the customer’s needs. Five weeks after we received the order, 10,000 garments arrive on the shelves in Europe, all looking like they came from one factory (Victor Fung cited in Magreta, 1998).
Li & Fung clients benefit in several ways: supply-chain customization
shortens order fulfilment to weeks instead of months. This faster turnaround
37
allows clients to reduce inventory costs. But also, main customers create
longer term collaborative relationships with Li and Fung whereas the
suppliers are coordinated virtually. According to Victor Fung, “Li & Fung
manage and orchestrate it from above. The creation of value is based on a
holistic conception of the value chain.”
William Fung, the company’s Managing Director, points out that:
Because of our old-economy history and our network, we can inspect suppliers’ goods much easier. Buyers don’t have confidence to buy from anonymous suppliers that they don’t know. We think we can bring the two together within the Li & Fung network, we can build a business using the Internet to aggregate suppliers on their stock positions (William Fung cited in Lee-Young and Barnett 2001, p. 77).
Opportunities to learn from agglomerating with both pure trading firms as
well as collaborative partners has important consequences:
If you can shorten your buying cycle from three months to five weeks, for example, what you are gaining is eight weeks to develop a better sense of where the market is heading. And so you will end with a substantial savings in inventory markdowns at the end of the selling season (Ibid).
Strategy, IT-based links and cost information are integrated in the company
to achieve this balance. The value of an organisational design which brings
together firms for the provision of standardised inputs over time phases and
from which learning benefits are minimal alongside longer term
collaborations on the design side is extensive and an aid to competitiveness
tied to organisational structure, technology, strategy and cost information
thus:
38
Our customers have become more fashion driven, working six or seven seasons a year instead of just two or three. Once you move to shorter product cycles, the problem of obsolete inventory increases dramatically. Other businesses are facing the same kind of pressure. With customer tastes changing rapidly and markets segmenting into narrower niches, it’s not just fashion products that are becoming increasingly time sensitive…We need flexibility… And we also benefit from their exposure to their customers (Victor Fung cited in Magreta, 1998).
Li and Fung is an example of a new organisational firm poised to couple
both traditional trading links and collaborative relationships. The cost effects
of such structuring allows the firm to minimise fixed cost investments via
extensive outsourcing and to minimise variable costs by having standardised
products and using its IT based infrastructure to render visible minimum
cost providers. Cost management acquires new meaning in such contexts
because it integrates strategic choices, technological input and cost control
(Bhimani, 2008). The process of identifying one or more of many suppliers
for satisfying the needs of a specific customer with a defined strategy-
technology- cost balance subsumes the firm’s operational premise. Thus, Li
and Fung’s enterprise processes focus on a highly rationalised cost
management philosophy of tight cost management and revenue generation
via a total focus on customer needs. This also illustrates a turning point in
the visualisation of strategic input within the firm’s modus operandi.
The management accounting implications of such highly refined
organisational structuring and activities are extensive. Here, form
39
subsumes strategy which co-integrates both IT inputs and cost control.
Organisational action simultaneously creates and implements strategy. A
transaction dictates thinking about and operationalising in a specific way via
both traditional trading processes and collaborations. Each transaction may
differ in the mix of pure trade and collaboration deployed. Each transaction
thereby creates high strategy-technology-cost control specificity.
Management accounting in such contexts may serve to facilitate the enabling
of such organisational potential by focusing on the exclusive information
needs of that specificity.
CONCLUSIONS
Whilst traditional management accounting techniques continue to play a role
in terms of cost-benefit and incremental costing based impact, the
complexities of fast changing markets point to the managerial adaptation of
coupled decision making thinking and action. Standardised and electronic
enabled transactions embed both decisions and actions and globalization
undescores this type combined decision making and action. But a wide set
of organisational activities still presume action consequent to decision
making. Yet such decisions are themselves only partially formalised and
partly loose and flexible and collaboratively grounded. Moreover, managers
increasingly take action when planning and deciding on organisational
action rather than after formal strategic plans are settled. Thus,
40
organisational complexities do not allow clear distinctions between
decisions and actions and the formalised and informal control of operations.
The traditional duality of decisions such as make or buy or
insource/outsource is not clearly distinguishable in a globaling and digitizing
environment. There is increased ambiguity of organisational engagement
where both competitive bidding and collaborative relationships coexist and
operations are coupled together. Information systems themselves do not
have clear boundaries coinciding with rigid organisational structures or
precepts especially where the boundaries themselves are becoming blurred
between organisations. Systems have to span enterprises with information
being accessible to competing and cooperating partners, suppliers,
assemblers, designers and developers and other organisational players as
well as customers.
Organisations are increasingly adopting “fluid” structures. Globalization and
the digital economy mean that industrial value chains have altered in
structure over the past decade. Convergence across industries has created
new organisational missions and novel business models. Products are often
now co-conceived and co-produced by enterprises, their suppliers and their
customers. Customer groups themselves have altered products, enhanced
features and deleted functions. Indeed, customers determine prices and
costs, in vogue and out of style product content and create the nature of
business platforms for trading (Bhimani, 2008).
41
In a digitised, global and fluid economic environment within which firms
must compete, financial management and cost control face important
challenges. This applies to both large and small enterprises with the
presumed conceptual linkage between firm size and control no longer
remaining unproblematic. Management accounting has always encountered
calls for change. Sometimes these have often been premature and at times
reflective of consultancy linked interests. This essay is not intended to be a
forecast of doom for management accounting. Rather, the concerns
presented here are meant to be indicative of some of the pressures which
the field and organisations will have to tackle progressively on a scale not,
perhaps, previously witnessed. Management accountants themselves may
wish to question whether in the face of these pressures, they should either
retain or retreat to their familiar character of costing the firm’s existing
operational activites, reporting on past managerial performance, acting as
the organisation’s financial police force and running what other managers
see as a separate, independent and expertise focused functions.
As has been noted here the digital and global economy compress together
strategy formulation and actions. To help in such a combined generation
of objectives and actions, accountants may become more part of the
decision making process both by becoming hybrid accountants and becoming
more grounded members of management teams. Digital and global
42
influences are bringing to bear within firms both consumer and supply
markets characteristics and wider strategic concerns
A number of approaches have been discussed in the management
accounting literature. In accounting, portfolios of these techniques have
sometimes been called strategic management accounting. At least, for
some of these practices, management accountants have comparative
advantages. However, the danger for accountants is that organisations in
the midst of a global and digital environmental change will use these
techniques whether accountants are involved or not. Further, the possibility
exists that strategic management accounting, as it has been conceived, may
not continue to address emerging organisational challenges if it retains a
static form. Management accounting is not immune to continuous
reinvention and interpretation. Thus, like organisations, the management
accounting field itself must address issues raised by modern day
globalization and digitization forces.
43
Diagram 1 Strategy and Corporate Performance in a Digital and Global Economy
STRATEGY
GOVERNMENT
FINANCE
MARKET
ACCOUNTINGCONSUMER
MARKET
SUPPLIERSFINANCE
MARKET
FINANCE
MARKET
IT,Web and
Broadband
enabled
IT,Web and
Broadband
enabled
44
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